Download Benefiting from FDI- LDCs` policy options

Benefiting from FDI- LDCs’ policy options
By- Ismail Ali
The Independent, Saturday, 24 November 2012
In recent years, Foreign Direct Investment (FDI) flows have increased more than either world
trade or world production: from $25 billion in 1975 to a record $1.2 trillion in 2000 and the
LDCs’ approximate share is $335 billion in 2005, according to UNCTAD (2008). Among the
types of capital flows and mode of entries – equity, portfolio investment, bond finance,
commercial bank lending, greenfield, joint-venture or merger and acquisition – the most
significant and large-scale capital inflows into developing countries is FDI.
Virtually every country in the world competes for it and Less Developed Countries (LDCs) have
joined this race especially in the past decades in the hope of economic development.
But all FDIs are not favourable to host developing countries nor guarantee economic growth
automatically. As FDI is the result of mutually beneficial interest between countries and
investing companies, many say usually countries become the loser when bargaining takes place.
Because those corporations that offer FDI are usually run by most efficient and capable people
compared to LDC government officials and bureaucrats.
Dunning and Narula (2004), two internationally acclaimed experts in the field of FDI, put the
conflict of interest like this: “Although governments and policy makers of most of the host
countries today are competing to attract FDI, with little consideration of how the benefits are to be
appropriated. The MNEs (Multinational Enterprise), as with most private economic entities,
desire to maximise their own welfare while the national governments wish to do the same for their
citizens.”
On another development, Dunning (1994) insists “The benefit of FDI particularly depends on: the
kind of FDI; the conditions that prompted it; the type and age of the investment; the existing
competitive advantages of the host country and the organizational strategies pursued by host
government.
One difficulty faced by many governments on formulating and implementing policies that affect
the costs and benefits of FDI is that they either do not have the knowledge to assess the same, or
are uncertain about what those costs and benefits actually are.
What types of foreign direct investments (FDIs) could be appropriate for less developed countries
(LDCs) involves a complex set of firm-specific investment types and individual country-specific
absorbing capacity. The realization of potential benefits from FDI is a challenging process at
which relatively few countries have been successful.
While acknowledging the role of foreign direct investment (FDI) in development, Dunning and
Narula suggest, decision makers of developing countries – vying for FDI-led development – must
be cautious and sincere. The only countries that have attracted the "right kind of FDI" are those
that have the appropriate knowledge and infrastructure, sound and stable economic policies and
potentials for competitive domestic sectors.
Mayer and Ramamurty (2004) argue, the earlier optimism regarding FDI as an 'engine of
development' has virtually evaporated and replaced with an arguably more realistic assessment. In
a similar finding Aaron Hadjimichael (2001) though he acknowledges that FDI impacts on
economic well-being for poor developing countries insists, "It will not happen automatically."
Foreign investors are fallible people just like any others and they need to operate under the right
conditions to bring out the good side of FDI, they added.
Like one-size does not fit everyone, all FDIs necessarily cannot serve the purpose of less
developed countries (LDCs), the way they wished for. Dunning and Narula argues "The particular
types of FDI tend to be attracted by countries with certain levels of economic development;
these are highly correlated phenomena depending on the specific resources, institutions,
economic structure, political ideologies and social and cultural fabric of a country."
Dunning (1994) classified FDI as (i) natural resource-seeking (ii) market-seeking (iii) efficiencyseeking, and (iv) strategic asset-seeking. The first two while more appropriate for LDCs, second
two are better suited for advanced and industrialised countries. Studying 111 countries over seven
5-year periods from 1970 to 2000 Velde & Xenogiani (2007) while exploring that countries with
few skills tend to specialize in low-skill intensive production, countries with high innovation rate
and skill endowment tend to specialize in the production of high-skill intensive goods.
Kyaw and Macdonald (2009) argue 'upper middle-income countries appear to gain from capital
inflows than low-income countries'. Benefiting from FDI, Bhagwati (1998) suggest, poor
developing countries should "pursue an export promotion strategy than in pursuing an import
substitution strategy."
Supporting this findings Rudraff et al (2009) argues export oriented subsidiaries grow faster, pay
higher real wages, are larger in terms of total sales and are more dynamic technologically than
market-seeking FDI.
Some experts in the field of international business believe foreign direct investment can work for
the poor when they operate in labour-intensive low-skilled sectors (such as agriculture and textile)
and export oriented markets.
But Jain and Vachani (2006) provide evidence that low-skilled workers - most of whom are poor are unlikely to gain much on TNCs’ production side although they might however, benefits as
consumers, as domestic competition puts downward pressure on prices, including some that are
common goods like food.
Finding the causes that motivates firms to invest in different countries, Dunning’s OLI paradigm
(1994) says investments are motivated by far the most comprehensive and neatly synthesise
elements, where he claims, investing firms must possess advantages which no other firm posses,
the country it wishes to invest it should offer location advantage , and it must be capable of
internalizing operations. Ghauri and Buckley (2006) point out that the key motives behind MNEs
led FDI are: access to larger markets, access to raw materials and inputs, access to lower-cost but
skilled labour and access to lower taxation regimes.
Host countries’ local conditions always play a role not only to gain from foreign investment but to
attract it. The most common characteristics of attracting foreign direct investment (FDI) is: the
level of infrastructure, the quality of labor force, transportation, communications, energy,
financial sectors, low nationalization risk, intellectual property rights, democratic wellfunctioning regimes where rule of law is upheld with vigorous civil-society, larger local markets,
minimal trade barriers, lower interest rate regulations, tax incentives, less corruption, and certain
degree of industrialization.
These findings have emerged from in-depth study by the influential authority in the field of FDI
such as Moi (2004); O’Brien and Beamish (2006); Gorg and Jabbour (2009); Dutta and Roy
(2009); Agosin and & Machado (2005); Wei (1999); Ganstanga et al (1998); Lee and Mansfield
(1996); Rugman and Doh (2008); Jain and Vachani (2006); Mayer (2007); Ramasamy and Yeung
(2010).
And to gain from FDI, LDCs need to satisfy three conditions: (a) does this kind of FDI attracted
generate any significant spillovers? (b) Does the domestic sector have the capacity to absorb these
spillovers? (c) Is the FDI that is being attracted a substitute or complementary to domestic
industry? (Dunning and Narula 2004). Delivering a level-playing field is a major pre-condition
for benefiting from FDI. The economic benefits of TNCs seem to be highly conditional by the
capacity of local economies to absorb new technologies and management practices manifested in
FDI.
High profile scholar in the field of FDI such as Rugman (2006) argues, multinationals’ interest in
investing in developing countries is affected by host government policies. Abedian (2005) links
‘good governance’ with economic development. He says most of the African governments are
actively engaged in improving governance as a means of sustainable growth and socio-economic
advancement.
In terms of host governments’ policy on FDI-benefits, according to Mai (2004), the development
experience of East Asian countries and countries in transition towards a market economy has
shown that ‘government policies can help to maximise the positive impacts and minimise the
detrimental effects of FDI flows and economic integration.
Good infrastructure is a hallmark of economic development. "A 1 per cent increase in
infrastructure leads to a 0.30 per cent increase in employment rates, A 1 per cent increase in
literacy rate leads to a 0.02 per cent in employment rates" (Asiedu 2006).
Access to it as fundamental to poverty reduction and well-being of the poor (Yamin, Rudolf
2009). But developing countries are struck in a vicious circle due to their failure to improve their
human and technological infrastructure, macroeconomic policies and institutional frameworks,
because the countries do not have the appropriate social-institutional systems and the necessary
technological and organizational capability, which has led to dissipation of potential net benefits
from FDIs.
There is evidence that positive developmental impacts of FDI flows are conditional on high levels
of human capital and thus on the existence of ‘good’ infrastructure in recipient countries. The
existence of adequate infrastructure and human capital in developed countries, strongly suggest
that the impact of FDIs on economic productivity growth is much stronger in developed
economies than in less developed economies.
Echoing Yamin and Rudolf findings, Dimitratos et al (2009), investigating 264 MNCs
subsidiaries based in the UK found positive impacts of infrastructure and human capital
development.
The writer is a researcher on Transnational Corporations living in London, and can be reached at
[email protected]